ARTICLE TABLE OF CONTENTS
In the eCommerce space, one of the most common terms you may hear is dropshipping. While this is a very popular and continuously growing online business model, it is important to avoid any legal issues.
What is Dropshipping?
If you’re purchasing items from an online store, there’s a good chance your items came from a dropshipper. Dropshipping is retail fulfillment, allowing retailers an opportunity to expand their merchandise and inventory without having to do it themselves. In fact, the retailer operates as the vanity piece, offering the products while the dropshipper does the heavy lifting.
This business model is good for entrepreneurs who don’t have the space or capacity to stock products and fulfill large orders. In this instance, the retailers are buying wholesale from suppliers who are able to handle volume and variety.
There are a number of benefits to dropshipping:
- Low startup risks: The costs involved in getting started are little to none. You won’t need a warehouse to store products, and you won’t have to worry about whether you can get the inventory you need. Shipping is also something that won’t be an issue, as the fulfillment center takes care of everything. The only thing you really have to focus on is good marketing and ensuring you have partnered with the right vendors.
- Lower product costs: The costs of products are smaller initially and it is an easy model to scale. As long as products are not being stored in a warehouse costing you money, the math is simple. Low costs, no overhead and growing profits.
- Low storage and logistics: The logistics are easy – you set up a website, promote your products, make them accessible to the general public and the rest is done for you. It’s very easy to manage since everything is automated. You can go on vacation or travel while managing your store from anywhere in the world.
- Variety of product offerings: Dropshipping helps businesses quickly expand their offerings to a full catalog. For someone just starting out, it can help get their brand out amongst the competition. It also allows very small brands to present themselves as a larger entity.
- Overall flexibility: This is a very flexible business opportunity that allows you to set your own rules and run your business how you want to. As things grow, you can add administrative team members to ensure everything is run smoothly, but the headaches a lot of businesses go through when having to have a brick-and-mortar are gone.
How does Dropshipping work?
When someone places an order on your website, it gets routed to the dropshipper to fulfill the order. Depending on what the product is, the dropshipper works with manufacturers, distributors or wholesalers to pack and ship those products. There are also some drop shippers who offer customizations. The drop shipper adds your company name to the packaging and you receive a percentage of the profits.
This makes it very easy for someone to start a business with little to no money, plus they can manage the business from anywhere in the world. This works well with private label products and companies wanting their own branding on the products.
While there are benefits to dropshipping, there are some disadvantages as well:
- Margins: The margins on dropshipping can be slim until you get things rolling. In fact, it could turn out to be very expensive, which may turn out to not be worth it. If you are dropshipping in a niche that is well-saturated, it could be more difficult to get your brand in front of customers to turn a profit.
- Processing: While the model seems very easy, there are some glitches when dropshipping. If your fulfillment provider uses multiple distributors, they could run into problems on their end. During a tight holiday season, you may also experience a lag in production which could result in customers not getting their items in a timely manner.
- Control: Although dropshipping does offer tons of flexibility, anything that happens once your orders are place is relatively out of your control. You won’t know how the fulfillment center stocks products, how often they ship, or their general process. That means when something goes wrong, it could significantly affect your reputation.
- Customer Service: If you don’t know what’s going on at the fulfillment center, when customers call to inquire about their order, you won’t have accurate information to give them. This presents a lot of challenges, especially if your brand is taking off. You have to determine whether you want to take the risk.
Is Dropshipping legal?
Yes, dropshipping is perfectly legal. It is important to have a full understanding of your supplier’s policies and whether they are legally procuring the merchandise. The best way to protect yourself from any unknown liabilities from negligence on the part of the supplier is to have a Dropshipping Agreement Contract in place.
Is Dropshipping on eBay legal?
Yes, dropshipping on eBay is legal, but there are a few stipulations. As the original vendor, you are responsible for the item being delivered within the time frame stated on the listing. The seller must guarantee the item will be delivered within 30 days max.
Is Dropshipping legal on Amazon?
According to Amazon’s Drop Shipping Policy, dropshipping or third-party fulfillment is allowed but the vendor must meet the following criteria:
- Be the actual seller of record
- Identify yourself as the seller on all customer-facing communications
- Remove any and all customer-facing communication identifying a third-party drop-shipper prior to shipping the order
- Be the party responsible for accepting and processing any customer returns
- Comply with the terms of the seller agreement
In what countries is Dropshipping legal?
Dropshipping is legal in most countries, but there could be some problems in certain countries where your items may end up lost or held up. In some of these countries, fraud is also at an all-time high. These countries include India, Indonesia, China, Afghanistan, Pakistan, Iraq and Malaysia. Before considering shipping to countries outside of the U.S., you must know the rules.
It is also important to note that in order to drop ship to the USA from another country, a USA Reseller Permit for e-store owners must be obtained.
Legal issues to avoid when using Dropshipping
While dropshipping can be very lucrative for businesses, it is always important to know and avoid issues that can result in legal ramifications. Knowing the rules can help alleviate these problems. Here are a few legal pitfalls to avoid:
- Not paying taxes: Let’s face it – taxes are always in the mix when it comes to business. Knowing the tax laws and how to remain compliant is key in avoiding fines. The laws on what can be taxed and where is continuously changing. You must consider sales tax, how much and whether the location of the purchaser must be taxed, as every state operates differently. At the end of the quarter or year, you may also have to pay income taxes. Work with an attorney or tax professional to make sure your taxes are being paid on time and are the correct amount.
- Trademark or copyright infringement: When certain products are selling very well online, it’s easy to want to join the party. The problem with that is some of those items may be infringing on another company’s trademark or copyright. If caught, you can be sued which could ultimately shut your business down.
- Selling illegal or prohibited products: It’s always best to have a good working relationship with your fulfillment center. If they are selling illegal or prohibited products, it could also put you and your company in jeopardy. Payment providers also have a list of prohibited products and services, as well as certain website providers, such as Shopify
- Product Liability: You can be held liable for a number of reasons when selling merchandise. The products may be defective or something else could occur. It’s always a good idea to know where your products are being sourced from because even if you are the third-party seller, it’s your responsibility because the items were purchased from your business. Business insurance will help protect your liability in these instances.
- Breaching contracts: You may be unhappy with the service you are receiving with your dropshipping provider, but you cannot just stop doing business with them if you have a contract. This is a legal, binding document that can leave you liable for damages if you breach. The best solution would be to try and work things out with the dropshipping provider. If things cannot be resolved to your liking, it would be best to retain the services of an attorney.
- Refund policies issues: When you have an online store, you do not have to have a refund policy, but you must have your store policies somewhere on your store’s site. This will give customers a heads-up on what rights they have should a product arrive defective or it did not meet their approval. In cases like this, customers would probably want a refund or exchange. If you have a refund policy on your site, that will help you deal with unruly customers. One of the worst things that could happen is a customer spreading negative comments about your brand because you didn’t have a clear policy stated.
- Noncompliance with E-Mail marketing: If you’re going to do any email marketing, make sure you have customer opt-ins and a clear opt-out solution. Make sure you comply with any opt-out requests immediately. Any language you use should be clear and free of deception. Your message should also be labeled as an advertisement. If you make any amendments to your policies, your audience should know.
Do you need a business license?
It is always wise to register your business and obtain a license when doing business, even online. Depending on your state or locality, there are taxes that may have to be paid. Additionally, when working with different payment providers, they generally want to see that you are a fully registered business entity.
Although you may sell items without having a business license in a locality, it may eventually cause problems when people are looking for businesses in the area. Additionally,, if you are doing business in certain areas without a license, you won’t be able to participate in certain events because you don’t have proof of a valid business registration for that area.
Dropshipping has helped tons of businesses make their mark in the industry with little to no startup or overhead costs. While there are a few drawbacks, it is still worth pursuing if you understand the intricacies involved. Dropshipping can be very profitable, resulting in many retailers launching six-figure businesses from the comfort of their homes.
Are you considering a dropshipping business? It’s important to fully understand the model, supply chain, legalities, areas of shipping and fulfillment, and how much time and effort you want to invest. The main thing is understanding the legal aspects of what you can and cannot do before taking the first step.
This should help you understand the do’s and don’ts of dropshipping to keep your business and customers protected.